The Tax Credit is Ending... Now What?

A $8,000 Federal tax credit to first time home buyers resurrected a housing market across the country. California added it's own home buyers tax credit that had two buckets... one bucket was for the first time home buyer and the other bucket was for people purchasing new construction. Potentially this meant up to $16,000 in tax credits available to the first time home buyer in California. With the Federal tax credit no longer available and the California money running out people are wondering what is going to happen. Though no one exactly knows I think this there is a possibility that this creates an unbelievable opportunity for the first time home buyer.

I was talking with a potential client last night and we are both economic theorists. I told him that I thought it is possible that he isn't missing out at all. Theoretically speaking if you are competing against other home buyers during the period in which everyone is trying to get the tax credit than this is keeping pressure on pricing because demand is up. If demand retracts after the expiration of the credit and it allows you to negotiate a better deal than it may have been a good thing to wait.

Again this is theory:

Let's just say you could buy a great home for $600,000 home pre-expiration of the credit. Tax credit savings = $16,000.

Let's speculate that the same property at some point later this year after the expiration of the credit the same house could be negotiated because of a lack of competition in the market down to 550K. This 50K savings over the life of the loan is equivalent to $120-130K in actual savings. The argument could be made that if you took the 16K and invested it that that might be a larger return at the end of the day but the reality is that most people will not do this. Instead the potential savings negotiated off the purchase price is real money today in saving you on your monthly payment as well as saving over the life of the loan.

As always… Do your due diligence.

From the Desk of Zach Trailer
By Lanny Berg